Market decline

Bill Schmick: Consumer Price Index Triggers Market Decline | Company

Persistent inflation, represented by Tuesday’s consumer price index (CPI), caught most investors off guard. The resulting stock market rout sent all three major averages down more than 4%. It was the worst market day in over two years. Is the sale over?

I doubt. The decline in the outburst spared few stocks. The dollar soared and most commodities as well as precious metals fell. That’s what happens when you put everyone on one side of the boat.

Many analysts, traders, economists and retail investors had driven stocks higher in the days leading up to the report on anticipation that the CPI would translate into a cooler inflation picture. The reverse happened and everyone headed for the exit at the same time. On Wednesday, the Producer Price Index (PPI) was a bit better and came in line with the consensus forecast.

It only took about an hour before strategists raised their expectations for the duration and height of the Fed’s interest rate hike. At least one Wall Street analyst myself has raised his expectations for next week’s FOMC meeting rate hike by 0.75 basis points to 100, or a full 1%.

I’m sticking to an increase of 0.75 basis points. And after this week’s CPI, most financial circles have given up on their misconception that the Fed might take a more dovish stance next week.

This week, the Biden administration stepped in to avert a US railroad strike that could have been a disaster for the economy. Aside from saving product shipments, the strike could have added a percentage or two to the rate of inflation, depending on how long the strike lasted. However, markets barely recognized Biden’s “backup.”

The overall macroeconomic data still points to an economy that is doing well, especially the labor market which still appears to be growing and with it rising wages. This is bad news for the markets, but good news for the economy. The Fed needs to see demand start to slow and the labor market to cool before it even thinks about pausing its tightening policies.

This means that the stock market will continue to be pushed lower by higher interest rates and further quantitative tightening. As the markets tend to do, everyone is now hurrying to the other side of the boat. Expecting easing earlier this week, investors are suddenly convinced that the Fed’s tightening will trigger a deep recession. You can’t make this stuff up!

If you’re looking for proof that the Fed is going to over-tighten and cause a disastrous decline in economic growth, look no further than Friday.

Some companies are issuing warnings about the future health of the US and global economies. In a single day, FedEx issued a profit warning due to falling parcel delivery volumes around the world. International Paper said it was hurt by decelerating orders and a glut of inventory. And General Electric said the company’s cash flow remained under pressure as supply chain issues continued to impact their ability to deliver products.

FedEx fell more than 20% on the news, dragging the entire transportation industry down in its wake, as the company is a leading indicator of the future health of economic growth.

In my opinion, the high CPI reading has extended the duration of the Fed’s tightening regime by a quarter or two. Big money in the market thinks the Fed has gone astray and that remaining “data dependent” suggests the Fed doesn’t know what it’s doing.

I still expect next week’s Federal Open Market Committee meeting to deliver bad news – more hawkish statements – that allow investor hysteria to spread. But maybe, just maybe, Fed Chairman Jerome Powell will try to restore some of the Fed’s credibility by proposing a final target federal funds interest rate for this regime. tightening. The historical average for the federal funds rate is 4.25%, and assurances that it will not go higher could help markets recover.

As I said last week (and several weeks before that), “a retest of the lows of the year in the coming weeks” was, and still is, my call. If we break the lows of the year, my terminal value on the S&P 500 index is 3,500. However, there is no need to go straight down. We could see bounces that could push this index up 100 points or more and then drop again.

Bill Schmick is registered as an investment adviser representing Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401 or by email at [email protected]